Thomson Medical – DBS

Delivering the goodies

Story: 1H08 earnings grew 28% y-o-y to S$5.7m, slightly stronger than we expected, on the back of higher revenue and improved operating margins.

Point: Revenue for 1H08 at S$29.5m was 22% stronger than 1H07 as the Hospital delivered an average of 740 babies per month compared to 640 in 1H07. TMC achieved a record 818 deliveries in Nov 2007 as the newly refurbished resort-style facilities attracted more patients. The upgraded facilities also helped to improve gross margin by 2.3 ppts to 44.6%and operating margin by 1.6 ppts to 24.1%. The Group continued to recognise consultancy fees from the Vietnam venture with a further S$0.3m being received in 1H08. It also managed to optimize space utilization as promised. With the administrative office at Level 6 moved off-site, six new patient rooms are being added, including four suites. In addition, the Thomson Lifestyle Centre on Level 5 will be moved to the nearby Novena Medical Centre to create more space for clinics. Also in line is the renovation of Level 3 and addition of two operating theatres.

Relevance: We raised FY08F and FY09F earnings by 4.6% and 3.1%, respectively, after taking into account the higher-than-expected inpatient admissions and improved operating margins in 1H08. However, we reduce our DCFbacked Target Price to S$0.77, after imputing a higher WACC of 8.0%; market risk perceptions have changed since our previous report. This translates to 19.4x FY08 earnings and 17.5x FY09 earnings, a considerable discount to other full-serviced hospitals listed in Singapore. Dividend yield in excess of 3% should also support the stock price. Hence, we maintain our BUY recommendation for Thomson Medical.

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